Private real-estate trusts draw interest, scrutiny

Financial planner Dan Moisand.

August 29, 2013|By Richard Burnett, Orlando Sentinel

Dan Moisand hears from too many people who have lost their shirts in real-estate ventures gone bad. In Florida, it seems, someone is always getting taken by a speculative but dubious land deal, the Orlando financial planner said.

But in recent years, a growing number of the complaints Moisand fields are about a legitimate, but sometimes controversial, financial product called a nonlisted real-estate-investment trust, or REIT.

Those privately traded securities, which often promise sweet dividend payouts, have been attracting conservative investors fed up with the low rates of return on certificates of deposit and money-market funds. But some people are shocked later when independent appraisals, advocated by federal regulators in recent years, reveal that the value of their REITs holdings has fallen — as did much of the nation's real estate during and after the Great Recession.

"We've seen victims who have come to us for help after the values collapsed, the funds got into hot water, and they [the REITs] came nowhere close to paying dividends that were promised," Moisand said. "So what happened is, people got stuck in them with no option to escape without incurring big losses."

Complaints about nonlisted REITs — private versions of the more prevalent, publicly traded REITs — have led to scrutiny from government regulators, allegations of misleading sales tactics and multimillion-dollar court settlements. Some of the biggest players in the REIT industry have been sued by unhappy investors.

Yet during the first half of 2013, investors nationwide poured a record $10.7 billion into unlisted REITs and other nontraded, alternative investments, according to Robert A. Stanger & Co., a New Jersey-based investment bank.

Financial experts say private REITs have remained popular because investors consider them less vulnerable to the volatility of the stock market — a point highlighted in recent months by the decline in the share prices of publicly traded REITs, which have fallen along with the broader market amid concerns about rising interest rates.

Florida, with an abundance of retired investors attracted to real-estate-related financial products, is one of the country's more-fertile markets for both publicly traded REITs and nontraded REITs, according to Stanger & Co.

"Yes, they can work out, but it's not something that we recommend to any of our existing clients," said Blair Shein, a certified financial planner for Compass Financial Group in Deerfield Beach. "The risks, in our minds, don't outweigh the potential reward."

Critics of unlisted REITs say their central problem is a lack of transparency and share values that are set in near-secrecy. Unlike shares of a publicly traded REIT, which are valued daily on a stock exchange, the value of a nontraded REIT's shares — and its underlying assets — can remain shrouded for years, they say.

Although nontraded REITs may pay healthy dividends, at least for a while, as currently structured they should be off limits to most long-term investors because of the risk and uncertainty involved, said Susan Spraker, a financial planner and president of Spraker Wealth Management in Maitland.

"By definition, the fact that this kind of REIT is unlisted means 'investor beware,'¿" she said. "They are illiquid, which means you can't cash out for a long, long time. In the meantime, the dividend income can dry up and the valuations of the shares and assets can dry up as well."

Even reputable players such as Orlando-based CNL Financial Group Inc. have been sued by investors upset with the performance of a nonlisted REIT.

Earlier this year, some investors from Texas and Massachusetts filed a lawsuit in federal court in Orlando in connection with the CNL Lifestyle REIT, claiming CNL officials caused them to lose millions of dollars through a misleading private offering of stock at inflated prices. The suit seeks class-action status and damages of more than $5 million.

According to court documents, CNL Lifestyle conducted a secondary offering in 2011 and part of 2012 to raise as much as $250 million by selling shares at $9.50 each — a price the prospectus indicated was based to some extent on the shares' fair-market value, or what the open market would be expected to pay for them.

After the offering was over, CNL had an independent appraisal done in August 2012 that valued the REIT at $7.31 a share.

CNL has denied the allegations and says it complied with all federal regulations in disclosing to investors the risks involved and the subjective basis on which the REIT's shares were priced.